Chapter 7 Midterm 2 Flashcards
4 broad categories of production inputs
- INTERMEDIATE PRODUCTS, input that are outputs from some other firm, such as steel
- inputs that are provided directly by nature, such as land owned/rented
- inputs that are services of labour, such as employees and employers
- inputs that are services of physical capital, such as facilities and machines used by a firm
PRODUCTION FUNCTION
Q = f(K,L): Output = change(flow of capital, flow of labour services)
Economic profit function
economic profits = revenue - (explicit costs + implicit costs)
Accounting profits function
AP = Revenue - explicit costs
example of Opportunity cost of time
Carmy paying himself 500$ a month when he could be working for 5k$ a month
Profit max function (pi)
π = total rev (TR) - total costs (TC)
Short run decision making
length of time over which some firm’s factors of production are fixed (not variable, cannot be changed)
Ex: consider a firm that operates a call centre in New Brunswick and gets paid a set amount for each call answered. A short-run change for this firm might be the addition of extra workers, phones, and workstations so as to process more calls per hour.
Long run decision making
long run is length of time over which all the firms factors of production can be varied (except technology).
ex :In the case of the New Brunswick call centre, a long-run change might be the replacement of the firm’s existing telephone exchange with a better, digital exchange that can process a higher volume of calls. Note here that the firm has added more and better capital, with no necessary change to its variable factors which, in this case, are workers, phones, and workstations.
Average product =
AP = TP/L (total product/ # of units of labour
Marginal Product =
MP= ▲total product (TP) / ▲# units of labour (L)
What is the average-marginal relationship
both factors will eventually usually diminish. given quantity of fixed factors and variable factors (average or marginal variables)
Total cost =
Average total cost =
TC = TFC + TVC
ATC = TC/Q or AFC+AVC
Average variable/fixed cost =
AFC = TFC/Q
AVC / TVC/Q
marginal Cost =
▲TC/▲Q
What are the 6 types of firms?
example for each
- sole-proprietorship
- 1 owner, dep - ordinary partnership
- joint owners, dep - limited partnership
- owners and investors, law firms - corporation
- owners not responsible for anything done in the name of the firm - state-owned business
- SAQ, Canada post - NPO
- unicef, YMCA
Equity vs Debt:
Equity: Financial capital that is acquired through shareholders, in return for stocks, shares; payed out in dividends
Debt: financial capital acquired through loan agreements/ bonds often with interest rates; banks, sharks, etc
what are the terms of a loan
principal: original sum of money borrowed
interest: secondary payment
Redemption date: the time of expected payment
2 goals of firms:
- make profit and pay shareholders
- be a single, consistent decision making unit
VERY long run
factors of production and technology can be varied
Give the example you created to describe the difference between fixed and varied inputs in SHORT RUN PRODUCTION
A RESTAURANT:
FIXED:
-stoves, dishwasher, pots , cash machines
VARIED:
- food, employees, electricity, soap, etc
DEFINITIONS:
TP
MP
AP
TP: TOTAL AMOUNT PRODUCED IN A GIVEN PEROID OF TIME
AP: TOTAL PRODUCT DIVIDED by # of VARIABLE units (output/L)
MP the change in total product from the use of ONE ADDITIONAL UNIT OF VARIABLE FACTOR (▲tp/▲input)
LAW OF DIMINISHING MARGINAL/AVERAGE RETURNS (increases what and decreases what)?
IF INCREASE IN VARIABLE FACTORS are applied to a QUANTITY OF FIXED FACTOR, eventually MP/AP will reach a peak and start DECREASING
SHORT RUN COST DEF AND FORMULAs:
Total Cost
TC = TFC + TVC (fixed and variable)
sum of all costs a firm incurs to produce a given level of output
SHORT RUN COST DEF AND FORMULAs:
Average Total Cost
Average Fixec Cost
Average Varied Cost
ATC = TC/Q(units of output)
or
ATC = AFC + AVC
total cost of producing any given number of units of output divided by # of units = ATC per unit of output
Properties of:
-AFC
-AVC
- TVC
- TFC
AFC = Output ↑ ; AFC ↓ Spreading overhead
AVC = output ↑ ; AVC ↓ until minimum, then ↑ as output continues to rise
-TVC = Output ↑ or ↓, TVC changes in the same direction
- TFC = Output ↑ or↓, doesn’t affect the cost
Is marginal cost always fixed or variable? whats the FORMULA
Variable
MC = ▲TC/▲Q
wHAT IS THE RELATIONSHIP BETWEEN MP AND MC CURVES
they have a negative relationship, when one is at max, other is at min
what is the term for when the level of output corresponding to the minimum short run average total cost of a firm.?
Hint: it marks the LARGEST output that can be produced without encountering rising avg costs per unit
CAPACITY
AND less than point of minimum average = excess capacity
A change in the price of a variable factor shifts ______ and the _____?
average total cost curve and marginal cost curve
opportunity cost of capital formula
investment x % rate of return
If economic profits are negative, what occurs
firm exit
explicit vs Implicit costs
explicit = labour, maintenance, poo
implicit = opporitunity costs, investments
